Research On Vertically Integrated Enterprises’ Non-price Discrimination

In many network industries such as telecommunications, electricity, oil and naturalgas, most likely there is such a market structure: exists upstream and downstreammarket, the upstream market consists of a handful of monopolies who produce anessential input for downstream enterprises. For example, in China’s broadband market,China Telecom and Unicom own the national backbone network which contains most ofthe content providers. For Railcom and other broadband operators must rely on Telecomand Unicom’s Internet access. Thus it can be seen that Railcom and other broadbandoperators first buy the essential input as an intermediate product from Telecom andUnicom and then process it into final product. At last sell to the consumers indownstream market.If an upstream monopolist vertically integrates into downstream market and formsan vertically integrated provider (VIP) with one or two downstream enterprises. It willarise two concerns: in one hand, this vertically integrated provider may reap verticaleconomies and save costs; in another hand, it may trigger the VIP’s non-pricediscrimination. By reducing the quality of the intermediate product, delaying theshipment or keeping back some important information to reach the goal of weakendownstream independent enterprises’ competitiveness and manage to get greater profits.For example, in August2011, when the Google CEO announced the acquisition ofMOTO, it has aroused much panic among HTC and SAMSUNG who use the sameandroid system as MOTO. Because they have to worry about if they can be treatedequally as before. In September2011, the National Development and ReformCommission (NDRC) launched an antitrust investigation toward China telecom andChina Uni-com on the problem of broadband connection. This investigation mainlyfocuses on if China telecom and China Uni-com have taken advantage of their dominantmarket position to impede other competitors in the field of broadband access andnetworks settlement. Again this year, the NDRC imposed LCD panel makers such asSAMSUNG and LG a fine of353million Yuan, which is the highest ticket in amountimposed by NDRC so far. SAMSUNG, LG and some other enterprises not only usedtheir monopoly advantage position in LCD panel technology, conspired to manipulatethe price, as well as adopted unfair treatment to the downstream color TV enterprises inChina. Their main non-price discriminations are as follows: providing different purchase opportunities, different after-sale service, etc.These facts lead us to think: vertical integration can reduce externalities byestablishing a complete production chain, thereby saving the costs of production andsale, in a certain degree, vertical integration is beneficial to the increase of social totalwelfare. But vertical integration can motivate the VIP’s non-price discrimination towardthe downstream independent enterprises: by lowering the quality of the intermediateproduct, delaying the shipment, hiding key information to increase the costs ofindependent enterprises, and thus increase the VIP’s downstream profit. So what are thefactors affect the VIP’s non-price discrimination? How to effectively curb the non-pricediscrimination and harvest joint economic at the same time?To solve the above problems, this paper adopts the methods of theoretical researchand empirical research, through model derivation and simulation based on data fromChina Uni-com broadband market, we come to the following conclusions: First, VIP’snon-price discrimination is increasing as the increase of final product’s price yetdecreasing as the increase of intermediate product’s price; Second, VIP’s non-pricediscrimination is decreasing as the incensement of the subsidiary’s other elements costand the decrease of the independent enterprises’ other element cost; Third, only within acertain range, non-price discrimination is negatively related to the independententerprise’s price elasticity and positively related to the subsidiary’s cross priceelasticity, beyond this certain range, it’s difficult to judge the relation between non-pricediscrimination and elasticity; Fourth, VIP’s non-price discrimination is decreasing as thegrowth of the independent enterprise’s market share.